Friday, October 15, 2021

Hi, It's Stupid: The Last Post on Modern Monetary Theory


Statue from 2009 by the late William Fawke, in the Garden of Heroes and Villains, Warwickshire, via Ellen Herold's Pinterest.

Hi, it's Stupid to say Modern Monetary Theory is all wrong, but I just can't help myself.

George Berkeley, Bishop of Cloyne, the great Irish philosopher midway between Locke and Hume, argued brilliantly that things don't exist—I mean things, material objects, the out-there stuff we see and touch, in that you can have a perfectly coherent picture of the universe without them: all you need are minds, full of perceptions, and that's enough. Things corresponding to the perceptions don't have to be there. "Berkeley's system," says the Stanford Encyclopedia mildly,

while it strikes many as counter-intuitive, is strong and flexible enough to counter most objections.

Which made Dr. Samuel Johnson, the irascible lexicographer whose portrait serves as my avi, pretty mad. Because obviously the theory was revolting to his stolid English soul, but he didn't even know how to participate in the discussion. One day as he was leaving a church with his future biographer, James Boswell, they started chatting about it, Boswell observing that "though we are satisfied his doctrine is not true, it is impossible to refute it." As they spoke, they passed a big stone along the path and Johnson turned to give it a powerful kick, no doubt hurting his foot: "Thus I refute it!" 

Meaning, more or less, GTFOOH, are you telling me this doesn't exist? Deze nutz!

This is my problem with so-called Modern Monetary Theory. 

It enrages me, and I don't know how to explain why except by kicking that stone. I mean, to get down to the core of it, I see taxpayers and bond buyers sending checks to be deposited in the Treasury's checking account, and Treasury writing checks from the same account to pay its bills, and I assume that means tax collections and bond sales literally fund the government's operations. But MMT tells me I'm wrong, and stupid: in fact, government entirely funds itself "out of thin air", and what it does with tax money and bond proceeds is to delete them—poof!—annihilate them, into what looks like the same thin air, for other government reasons that have nothing to do with funding, and I'm an idiot for not being able to see that.

Why? How is that effectively different from what I thought? I mean, I understand that the collections coming in and the expenditures going out aren't literally the same stuff, the way they were when King John's Treasury was a roomful of gold and silver, but indeed not stuff at all, just ledger entries. But aren't they arithmetically more or less the same, over the long term? (Over the unthinkably long term, in a manner of speaking, since the main liability, the government's obligation to pay back the bond buyers, is always spread out over a 30-year period from any given moment in time, the national debt as designed by Alexander Hamilton, our nation's constantly refinancing mortgage and the source of its credit, which will never be and never should be paid down.) What does the thin air add to the picture? 

But I do see that it always comes, at least in the Modern phase of the theory (since its development in the 1990s from the "chartalist" ideas originating at the beginning of the 20th century), in the context of the same argument, that since taxes don't "pay for" anything, there is never a budgetary need to relate tax income to expenditure—while nothing comparable is ever said about bond sales, although I can't see how bond sales would "pay for" things any more (or less) than taxes do. In MMT discourse, taxes are always problematized and bond sales are taken for granted. Though Stephanie Kelton often seems unaware that borrowing corresponding to the deficit always takes place:

Whereas, in fact, as of September 2020, they had been borrowing (not particularly from China) to come up with dollars on a scale that outpaced that of the Second World War:

The amount of U.S. government debt has grown to nearly outpace the size of the nation’s economy in the 2020 fiscal year and is set to exceed it next year, as the virus downturn saps tax revenues, spurs government spending and necessitates record amounts of federal borrowing, the Congressional Budget Office said on Wednesday. Federal debt, as a share of the economy, is now on track to smash America’s World War II-era record by 2023.
What Dr. Kelton imagined the Fed had done isn't legal in the United States, and could not have happened. This was the bizarre error that got me talking about MMT in the first place. Why is taxation in general treated over and over again as something that needs to be carefully pulled out of the discussion, while borrowing doesn't even need to be noticed?

One idea I find compelling comes from Matt Bruenig, of all people, in a piece from February 2019 (What's the Point of Modern Monetary Theory?), that it really is all about taxation:

the bulk of MMT discourse is not really about what the best policy instruments are for maintaining price stability and debt stability, but rather about using word games to make people believe that the US can have Northern European levels of government spending without Northern European levels of taxation.

What word games? MMT theorists use, Bruenig explained, a kind of private language to "say things that are true under their definitions but confuse people who are not familiar with" it.

So they will say things like “taxes don’t fund spending” or things like “the answer to how will you pay for it is simply that you will spend the money” in discussions about, for instance, how to do welfare state expansions. Many people on the left read this and believe them to be saying that we can have a Nordic-style welfare state without increasing the US tax level. After all, if taxes don’t fund spending, then we don’t need them, right?

But that is not what they are saying. If you understand the MMT private language or have a couple of hours available to talk to an MMT advocate and slowly peel back the layers of obfuscation they like to use, you realize that “taxes don’t fund spending” is not saying we don’t need to raise taxes to expand the welfare state. Rather, it is saying that, in their idiosyncratic way of categorizing things, the necessary taxes do not “fund the welfare state,” but merely “offset the inflation caused by the money creation that funds the welfare state.”

That is, that's what's making me stupid. They really do know that the taxes are necessary, Bruenig holds, but use a language form that separates the listener from knowing it. 

And that is what the "thin air" in the formulation above does, creating the separation. Good economists like Paul Krugman understand it very clearly, and mock MMT a bit for thinking it's so devastatingly original when it's not (when the terms are translated into plain English they don't say anything new). The rest of us are confused, as Bruenig says, and divided between some of us who are outraged, like me, and reduced to stone-kicking, and others who are seduced; they want to hear that we can have a Nordic-style welfare state without a Nordic-style tax level, which is understandable; who wouldn't want that? And the confusion seems intentional:

The real point of MMT seems to be to deploy misleading rhetoric with the goal of deceiving people about the necessity of taxes in a social democratic system. If successful, these word games might loosen up fiscal and monetary policy a bit in the short term. But insofar as getting government spending permanently up to 50 percent of GDP really will require substantially more taxes in the medium and long term, I have to agree with Sawicky and Henwood in saying that MMT seems like a political dead end.

If Bruenig was right, that's clarifying, for me. It really is dishonest, but it also won't really work anyway.

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